We all know that there is a shortage of inventory. It has been a national topic of conversation, even for non-real-estate professionals, for quite some time. The question is: How long will it last, and is there anything we can do about it?
There are several interesting factors that have contributed to the recent surge in home prices, as well as the inventory shortage. Today, we’re going to focus on new construction and what that means for the overall real estate market.
As Ben Caballero wrote in his article for Inman:
“Beginning in 1959, the US Census Bureau started to record housing starts. During the 48 years between 1959 and 2006, builders completed 52,941,000 homes for an average of 1,102,938 homes per year.
“For the 14 years between 2007 to 2020, builders started 9,914,600 homes or 708,186 homes per year, which is 394,752 fewer starts per year than the historical average. This annual shortfall totals 5,526,525 homes during those years. In 2020, builders started 990,500 homes, still below the historical average of 1.1 million annual starts.”
Historically, annual home starts around 1.1 million per year was sufficient to meet supply and demand. If builders could build 1.5 million homes per year, the national home inventory would gain 400,000 starts per year to add to the current shortfall — which is about 5.5 million homes.
However, based on that math, it would take over 13 years to make up the shortfall! If builders could create 2 million homes annually, we could achieve a supply-demand balance in about six years.
Because of the shortage of new home construction starts, existing-home prices have gone up rapidly. Yes, in part due to supply and demand but also because there is no new product for the existing homes to be measured against.
For example, if you could buy new construction for $500,000, then chances are you are not going to buy a comparable existing home for the same price. Perhaps that property built in 2010 would sell for $475,000.
However, without new construction in that area, buyers may pay $500,000, $525,000 or more because there is simply no new construction “bar” to set home prices against. This is great news for sellers but not so great for buyers, particularly first-time homebuyers, who are getting priced out of the market.
We also know that lumber prices are still up by roughly 78 percent since the start of 2021, though they are beginning to fall somewhat. This is good news for homebuilders (and ultimately buyers) who have been feeling the effects of surging commodity prices for over a year now.
Of course, the record-high lumber prices over the past year certainly haven’t helped with the cost of new construction, which simply gets passed onto the buyer, once again potentially pricing new homebuyers out of the market.
As the owner of three real estate brokerages, a national real estate team, and a residential and commercial construction management and development firm, I’m seeing the real estate market from all angles right now.
Our existing-real estate sales are booming, as are our new construction reservation agreements. Despite this housing inventory shortage there was actually an increase in single-family home sales in 2020 — 5.6 million, up from 5.3 million in 2019.
Inventory is tight. Sales are up. New construction home starts need to increase. Buyers are missing out on deals. Sellers are cashing in on inflated equity in their homes. There is no doubt that real estate is a tough industry to be in right now. Which just means to me that opportunities abound!
Based on the data above, if you haven’t already, now is the time to start educating yourself on the new construction process and building a strong partnership with your local builders. They are likely going to be ramping up their new home starts over the next few years — the demand is there.
As a real estate professional, you want to be their go-to market and marketing expert. If you could hook up with a builder who had 20, 100 or 200 units to sell over the next few years, think about what that would do for your real estate business.
Not only could you potentially negotiate a deal with the builder on the listings, but you also have many more opportunities to bring buyer leads to the table, and of course, help those buyers sell as well. It’s a win-win-win.
The inventory shortage isn’t going to last forever. Like with any market, there are ebbs and flows. As new construction home starts continue to ramp up, existing-home prices will start to level out, and the supply and demand will find equilibrium again, though it might take several more years before we see that.
In the meantime, studying the economy, real estate market statistics and particularly the new home construction process will make you a fierce competitor in today’s market and the future.
Adam Hergenrother is the founder and CEO of Adam Hergenrother Companies
